One of the first questions prospective clients usually ask is, "How do you get paid?" And this is an excellent question. It seems simple, but in the financial services field - rarely are things simple. The truth is that there are many different ways that financial professionals are compensated for their services.
Some are paid a salary by their employers, but this arrangement is rare. Most financial professionals earn commissions from the products they sell to their clients - life insurance, annuities, stocks, mutual funds, etc. But some professionals charge only fees for their services.
You might ask - what's the difference? Another good question. It is confusing.
Basically, a commission is paid on the sale of a product - the more products sold, the more commissions earned. The problem is that these commissions are rarely disclosed to the client. And the salesperson isn't held to the fiduciary standard of care. In other words, they don't have to be certain this is the best possible product for their client's needs. They only have to be sure that it is "suitable" which is a fairly loose term in the regulations.
More and more, financial professionals are turning to a fee-only model - charging a fee for their services rather than a commission for the sale of a product. This might be a one-time flat fee for a financial plan or a small percentage of the account balance for investment management services. Either way - the fee-only model requires that an adviser work under the fiduciary standard of care - advising clients on the solutions that are best for them and their particular situation.
Fee-only advisers are not allowed to receive compensation from anyone other than their clients. And the fees are transparent - easily seen on each and every quarterly statement, not hidden in the fine print.
For these reasons I have founded Pathway Financial Services, LLC as a fee-only financial planning services firm, and am happily looking forward to the next time someone asks that all-important question, "How do you get paid?"
Jen Mulder
Read more about the importance of fee-only financial planners in this article from Forbes magazine and at the website of the National Association of Personal Financial Advisors.